A. Timberot plc
Timberot plc can only go after Leonard, but not Mashup plc. The reason for this is at that time the parties entered into an agreement, Mashup plc had no legal personality yet and, therefore, did not have the capacity to contract. Such legal personality only became real as of the date of its incorporation stated in the certificate of incorporation, which evidences conclusively that the company has complied with all the requirements of registration and is thus, duly registered as a company. As of the date of incorporation, a company is given a legal personality and all the capabilities owing it as a corporate body. These powers include the right to sue and be sued, to exist independently of its shareholders, perpetual succession, raise funds and other rights enjoyed by natural persons.
It is therefore, impossible that on 10 September 10 2014, Mashup plc can be bound in any way or be a party to a contract through an agent as it had no personality at that time. In Salomon v Salomon, the Court, in deciding whether the defendant was liable for the company or not, that either the company was a legal entity or not. If it was a legal entity, the defendant did not own the property, but the company. If it was, however, not a legal entity then there was no person – by fiction of law, that is – and, therefore, precluding the existence of an agency. In that case, a creditor wanted to recover unpaid debts from the majority shareholder contending that the company was a sham and was just put up to shield the real owner from his liabilities.
Even if Mashup plc had already been a legal person at the time the contract was entered into, there is doubt that it can be held liable for the act of Leonard. A shareholder is a separate entity from the company in which it has a share in. Moreover, a shareholder who is not a director has no business managing or acting as agent of the company. Shareholders have rights in enforcing proper management of the company and other rights, but these rights are exercised collectively through votes in proposed resolutions during general meetings. The OECD has laid down the basic rights and functions of a shareholder and these include the following: to cause the proper registration and transfer of shares; share in the profits according to his or her shares in the company; receipt of important information in a regular and prompt manner, and; voting rights on specific issues. Acting on behalf of the company by entering into contracts is not one of the rights or functions of a shareholder.
Considering the above, Timberot plc should go after Leonard in the latter’s personal capacity because the company cannot be held liable for debts that was incurred before it even became a full-fledge, registered company. However, it should not have entered into an agreement with Leonard when the latter shifted the responsibility of meeting the obligations to an entity that is still in the proposal stage.
B. Toolrust plc
Toolrust plc can bring an action against Mashup plc and its directors under the Company Act 2006 if the latter persists to honour its obligations it entered into with the former. In the first place, Mashup plc should not have begun doing business with other entities prior to October 16, which was the day it was issued a trading certificate. A trading certificate is issued by the Registry only after a company has complied with the requirements of authorised minimum of nominal share in the amount of £50,000 under §762 (1), statement of preliminary expenses under §762 (2), amount paid or benefit given to a promoter under §762 (3), and a statement of compliance under §762 (4). The satisfaction of all these requirements, results in the issuance of a trading certificate, which is conclusive evidence that the company can already engage in business and enter into contracts of loans. Since Mashup entered into a contract with Toolrust before it was issued a trading certificate, the company and all its officers are liable, and upon conviction are imposed fines. The liability is joint and several in indemnifying other parties for transaction they entered into before the issuance of the certificate.
Fortunately for Toolrust plc, the inability of Mashup to enter into business transactions prior to the issuance of its trading certificate does not invalidate the contract for the supply of tools to be used in the manufacture of its garden fences. According to the Company Act 2006, the breach of the company of the trading certificate rule does not invalidate such transaction. Rather, it compels the company and its officers to comply with its obligations within a set period of 21 days from the time the other party makes its demand. In addition, any economic injury suffered by such party for delay or failure in meeting such obligations shall be borne by the directors jointly and severally. In other words, Toolrust plc need not rely on common law repudiatory breach to go after Mashup, but can utilise the relevant provision of the Act to force Mashup and its directors to honour the agreeement.
C. Dinesh
1. Proposal to add to Regulation 22
Dinesh can just simply cast her vote rejecting the proposal to amend Regulation 22 of the company’s articles to achieve her goal of repudiating the proposal. To alter Regulation 22 by adding another ground to the termination of directors requires a special resolution and not merely an ordinary resolution, which is what is required in terminating a director before his or her term ends, under §21(1) of the Company Act 2006. A special resolution requires a vote of not less than 75% of the total voting eligible members. Under this rule, the proposed resolution will undoubtedly succeed considering that the four members can easily garner the 75% vote requirement. If all the other requirements as to form are followed, such as the 21-day notice, the proposal will naturally pass. However, an entrenched provision regarding Regulation 22 has been incorporated in Mashup plc’s articles, which could be exploited by Denish to prevent the passage of the proposal. An entrenched provision is one that places condition on the alteration or amendment of specific regulations in the articles. In the present case, this is embodied by the requirement of 90% vote of the total voting rights so as to effect an alteration or amendment of Regulation 22, which refers to the grounds for terminating directors.
In light of this entrenched provision, Dinesh can prevent the passage of the proposal to amend Regulation 22 by simply casting her vote. The total voting rights is 10,000 and 90% of such votes is 9,000. The voting rights of the other members of the company only totals 8000, which is below the required 90% votes, and is, therefore, insufficient to pass the amendment.
2. Proposal to Remove Regulation 4
Dinesh can go after Leonard, Anil, Bashir and Cecily for breach of the shareholders’ agreement if they pursue to vote in favour of the resolution. She can also apply for injunction to compel the four to abide by the agreement before they actually cast their vote to remove Regulation 4. She cannot, however, go after Mashup plc although it was a party to the agreement because a company cannot enter into an agreement limiting or suppressing its power to alter its articles. This was so held in Russell v Northern Bank Development. In that case, the House of Lords made a distinction between agreements among shareholders and agreements entered into by shareholders and the company joined as a party concerning amending or altering articles. According to the HL, the shareholders can agree among themselves how to vote on a certain matter, which would be unlawful if dictated by the articles and made binding on the company. On the other hand, the company cannot enter into an agreement that would, in effect, contradict relevant statutory provisions, which in this case is the right granted to it to amend its articles by special resolution.
Like all other contracts, a party in breach can either be forced, through an injunction, not to act contrary to the shareholders agreement or be sued after the fact for breaching it. The Law Commission has cited injunction as one of the shareholder remedies in its 1996 Consultation Paper. Denish may resort to any of these measures.
References
Cahn, A and Donald, D, Comparative Company Law: Text and Cases on the Laws Governing Corporations in Germany, the UK and the USA (Cambridge University Press 2010)
Company Act 2006
Coyle, B, ICSA Study Text in Corporate Governance (6th edition, ICSA Publishing 2009)
Mantysaari, P, Comparative Corporate Governance: Shareholders as a Rule-maker (Springer Science & Business Media 2006)
Ottley, M, Q&A Company Law 2013-2014 (Routledge 2012)
Russell v Northern Bank Development, [1992] 3 All ER 161, [1992] 1 WLR 588 (House of Lords)
Salomon v Salomon, [1897] AC 22
